October 07, 2013 |
Standard & Poor's Ratings Services said today it lowered its long-term issuer credit rating on the Russia-based midsize hydrocarbon producer and refiner Alliance Oil Co. Ltd. (Alliance) to 'B' from 'B+'. At the same time, we lowered the Russia national scale rating on Alliance to 'ruA-' from 'ruA+'. The outlook is stable.
The rating action reflects our belief that free operating cash flow (FOCF) will likely stay heavily negative in 2013-2014, compared with our previous forecast of broadly neutral FOCF for 2014. Consequently, debt to EBITDA will likely be higher than what we initially expected.
Owing to the unprecedented flood in the Russian Far East, we understand that the completion of the modernization of the Khabarovsk refinery and its connection to the Eastern Siberia–Pacific Ocean oil pipeline is going to be delayed. As a result, we now expect FOCF to stay heavily negative in 2013 and 2014. Consequently, Standard & Poor's-adjusted debt should increase.
We also expect Alliance's EBITDA will weaken over the second half of 2013 and into 2015, compared with the level for 2012 through the first half of 2013. We believe that the flood will likely affect Alliance's downstream profits in the second half of 2013. We understand that water levels are quite high and that Alliance's assets have not suffered damages from the flood and continue to operate. However, sales volumes may decline, and Alliance may not be able to pass the recent increase in domestic crude oil prices on to the customers. Moreover, we expect domestic oil prices will further increase after the Russian government decided to raise mineral extraction tax and reduce export duty as of 2014.
Alliance's upstream production is expanding, mainly owing to higher gas production. But profits per barrel of oil equivalent are lower than in oil. Also, sizable tax cuts that Alliance enjoys for its large Kolvinskoye field expire in 2015. Under our base-case scenario of Brent at $95 per barrel (bbl) for the rest of 2014, $90 in 2015, and $80 thereafter, upstream profits will contract sharply.
The rating reflects our view of Alliance's business risk profile as "weak" and financial risk profile as "highly leveraged." Alliance is smaller and less diverse than other rated Russian oil companies, and it is more volatile because of a large downstream segment. The company has a large investment program to achieve production growth and complete modernization of its key refinery, leading to considerably negative FOCF.
The stable outlook reflects our expectation that Alliance's liquidity will remain manageable, including covenant compliance. We expect FFO to total debt to be about 15%-20% in 2013 and about 15% in the longer term. We also estimate adjusted debt to EBITDA to be about 3.5x-4x in 2013 and about 4x thereafter.
We could lower the rating if liquidity becomes "weak," under our criteria. We could consider a positive rating action if Alliance successfully completes its key investments, if oil and product prices are supportive, and if its FOCF becomes positive.
At this moment, we consider both scenarios to be remote.
Company: Alliance Oil Company Ltd
|Full company name||Alliance Oil Company Ltd|
|Country of risk||Russia|
|Country of registration||Bermuda|
|Industry||Oil and gas|